By Ralph A. Castelli, Jr. and Brian R. Jenney

The following is a summary of certain important tax developments that have occurred in April, May, and June of 2019 that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Final regulations permit integrating HRAs with individual health insurance plans or Medicare. Final regulations have been issued allowing health reimbursement arrangements (HRAs) and other account-based group health plans to be integrated with individual health insurance coverage or Medicare, if certain conditions are satisfied (an individual coverage HRA). An account-based group health plan is an employer-provided group health plan that reimburses medical care expenses, subject to a maximum fixed-dollar amount of reimbursements for a period (e.g., a calendar year). An HRA is a type of account-based group health plan funded solely by employer contributions that reimburses employees solely for medical care expenses of employees or qualifying family members, up to a maximum dollar amount for a coverage period. The reimbursements are not taxed to employees.

Under the new regulations, an employer-funded individual coverage HRA reimburses employees for their (and eligible family members’) medical care expenses. The employer can allow unused amounts in any year to roll over from year to year. Employees must enroll in individual health insurance (or Medicare) for each month the employee (or the employee’s family member) is covered by the Individual coverage HRA. But the individual health insurance cannot be short-term, limited-duration insurance (STLDI) or coverage consisting solely of dental, vision, or similar “excepted benefits.” There are other important requirements as well.
The new regulations also increase flexibility in employer-sponsored insurance by creating another, limited kind of HRA that can be offered in addition to a traditional group health plan. These “excepted benefit HRAs” permit employers to finance additional medical care (for example to help cover the cost of copays, deductibles, or other expenses not covered by the primary plan) even if the employee declines enrollment in the traditional group health plan.

Employers can start offering individual coverage HRAs and excepted benefit HRAs on Jan. 1, 2020.

Next year’s inflation adjustments for health savings accounts. The IRS has provided the annual inflation-adjusted contribution, deductible, and out-of-pocket expense limits for 2020 for health savings accounts (HSAs). Eligible individuals may, subject to statutory limits, make deductible contributions to an HSA. Employers as well as other persons (e.g., family members) also may contribute on behalf of an eligible individual. Employer contributions generally are treated as employer-provided coverage for medical expenses under an accident or health plan and are excludable from income. In general, a person is an “eligible individual” if he is covered under a high deductible health plan (HDHP) and is not covered under any other health plan that is not a high deductible plan, unless the other coverage is permitted insurance (e.g., for worker’s compensation, a specified disease or illness, or providing a fixed payment for hospitalization).

For calendar year 2020, the limitation on deductions is $3,550 (up from $3,500 for 2019) for an individual with self-only coverage. It’s $7,100 (up from $7,000 for 2019) for an individual with family coverage under a HDHP. Each of these amounts is increased by $1,000 if the eligible individual is age 55 or older. For calendar year 2020, an HDHP is a health plan with an annual deductible that is not less than $1,400 (up from $1,350 for 2019) for self-only coverage or $2,800 (up from $2,700 for 2019) for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, not including premiums) do not exceed $6,900 (up from $6,750 for 2019) for self-only coverage or $13,800 (up from $13,500 for 2019) for family coverage.

2019 luxury auto depreciation dollar limits and lease income add-backs released. Annual depreciation and expensing deductions for so-called luxury autos are limited to specific dollar amounts. The dollar limit amounts are inflation-adjusted each year. The IRS has announced that for autos (which includes trucks or vans) acquired and first placed in service during 2019, the dollar limit for the first year an auto is in service is $18,100 ($10,100 if the bonus first-year depreciation allowance does not apply, for example, because the taxpayer elects out of bonus first-year depreciation); for the second tax year, $16,100; for the third tax year, $9,700; and for each succeeding year, $5,760. These dollar limits are $100 higher than the dollar limits that applied for 2018 (except for the post-third tax year figure, which remains the same).

A taxpayer that leases a business auto may deduct the part of the lease payment representing its business/investment use. So that auto lessees can’t avoid the effect of the luxury auto limits, however, taxpayers must include a certain amount in income during each year of the lease to partially offset the lease deduction. The amount varies with the initial fair market value of the leased auto and the year of the lease, and is adjusted for inflation each year. The IRS has released a new inclusion amount table for autos first leased during 2019.

Cents-per-mile & fleet average FMV maximums for 2019. IRS has announced that the 2019 inflation-adjusted maximum fair market values (FMVs) for employer-provided vehicles, the personal use of which can be valued for fringe benefit purposes at the mileage allowance rate, is 58¢ per mile for 2019. For 2019, the FMV cannot exceed $50,400 (was $50,000 for 2018). The IRS also announced that certain employers may switch to the cents-per-mile valuation method or the fleet-average FMV maximum for the 2018 or 2019 tax year.

For further information regarding these matters, please contact Mr. Castelli or Mr. Jenney at 248.528.1111 or via email.